Bought and Overbought: PowerRatings Point to Inverse Opportunities
Stocks ended Tuesday higher, buoyed in part by strength in energy and technology shares as well as by details about the Obama economic stimulus plan.
For the past several days, I have been talking about the growth in 1-rated stocks. Stocks with Short Term PowerRatings of 1 are the stocks which, according to our research, are most likely to underperform the average stock. In fact, we discovered that, since 1995, 1-rated stocks have underperformed the average stock by a margin of nearly 5 to 1 after five days.
When I see growing numbers of 1-rated stocks start to appear, I become all the more convinced that stocks are overbought in the near term. This idea is supported by other, more direct indicators like the 2-period RSI, which moved back into overbought territory in the S&P 500, Nasdaq and Dow 30.
There is another indication that stocks are becoming increasingly overvalued. The ranks of our Top 25 PowerRatings stocks are swelling with short and inverse exchange-traded funds with Short Term PowerRatings of 8. This further underscores how overbought stocks are right now, and how the best opportunities for short term traders are increasingly likely to be found to the downside over the next few days.
That said, of the five stocks in yesterday’s column, four remain oversold: the iShares Lehman Brothers 20+ Year Treasury Bond ETF, TLT
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PowerRating), the CurrencyShares Japanese Yen Trust ETF, FXY
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PowerRating), as well as stocks Quality Systems Inc.
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PowerRating) and Allegiant Travel Company
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PowerRating). These stocks can remain the focus for those short term traders looking to pick up stocks that have pulled back. TLT, QSII and ALGT still have Short Term PowerRatings of 8. FXY’s Short Term PowerRating is 7.
Does your stock trading need a tune-up? Our highest Short Term PowerRatings stocks have outperformed the average stock by a margin of nearly 17 to 1 after five days.
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